Starbucks cut its earnings outlook and plans to close more under-performing stores as part of a multi-pronged response to what chief executive Kevin Johnson called an unacceptable level of same-store sales growth Tuesday.
Starbucks said its profits will be lower than previously expected this year, and it will close more underperforming stores as part of a multipronged response to what chief executive Kevin Johnson on Tuesday called unacceptably slow growth.
The company said comparable sales growth at existing stores, a key measure of retail performance, was expected to be just 1 percent in the current quarter, despite a booming economy and a broadly healthy restaurant industry.
“That is, in my view, not an acceptable performance and we need to do better,” said Johnson, who has been in the top job at the Seattle-based coffee giant for a little more than year. That period has seen big strategic moves in China, a globe-spanning partnership with Nestle, a high-profile racially charged incident and unprecedented corporate response, and executive chairman Howard Schultz’s quasi-retirement, effective next week.
Starbucks said it now expects earnings in the range of $3.23 to $3.26 a share for the current fiscal year, down about a dime from its previous targets.
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Starbucks stock fell in after-hours trading. But the news was not all bad for investors.
Chief financial officer Scott Maw said the company is piling another $5 billion onto its already planned $20 billion budget for stock buybacks and dividends through 2020. Quarterly dividends will be boosted 20 percent to 36 cents per share over the next five quarters. Starbucks will borrow to finance the buybacks, Maw said.
Johnson laid blame for the disappointing sales growth at the feet of the once-vaunted Frappuccino, which accounted for 14 percent of revenue at company-operated stores as recently as three years ago. He said the entire “slushy coffee” category is in decline as consumers look for healthier options. At Starbucks, Frappuccino sales were down 3 percent this year through May.
He also pointed to the impact of the company’s response to the April arrest of two black men in a Philadelphia store, including the May 29 afternoon closure of 8,000 U.S. stores for anti-racial bias training. In addition to the lost sales on that day and the costs of the training, Starbucks delayed its seasonal marketing push, which it would have begun in mid-April.
“We lost momentum,” Johnson said in a presentation to analysts at the Oppenheimer Consumer Conference on Tuesday.
Starbucks aims to rein in spending, which grew faster than total sales in its fiscal second quarter. Maw said the company is bringing in an outside consulting firm to find cost savings, which Starbucks hopes to realize as soon as its fourth quarter. One area executives have targeted is wasted product, which costs Starbucks $500 million a year in the U.S.
It is also putting the brakes on the rate of new store growth, closing about 150 under-performing company-operated stores, up from an average of 50 closures a year recently, and by slowing the number of new stores operated by third-party licensees. U.S. net store growth peaked at 6 percent in Starbucks’ 2017 fiscal year. By 2019, the company plans to cut that growth rate to 3 percent.
Johnson said Starbucks has not reached saturation point in the U.S., but it will be more strategic about where it puts new stores, focusing on underpenetrated markets in “Middle America.” It will also try to optimize the store formats it offers, from small mobile-order pickup locations to drive-through to more elaborate high-end Roastery and Reserve stores.
In the latter category, Starbucks is capping the number of Roasteries – elaborate, theatrical retail showpieces – at six: the two in operation in Seattle and Shanghai, and four more planned for Milan, New York, Chicago and Tokyo in the next two years. Johnson said the company is still evaluating the economics of the Roasteries. Johnson described Starbucks’ smaller Reserve store format, such as the one opened at its headquarters in February, as being in “concept phase” – meaning it would build six to 10 of them and evaluate their financial performance before expanding further. Maw said during the company’s last quarterly conference call that it would be “beyond 2019” before the high-end retail business segment, an initiative championed by Schultz, would break even.